Thursday, April 03, 2014Last Update: 10:43 AM PT

Ubiquiti Shareholders Lose Suit Over Knockoffs

(CN) - A maker of broadband wireless devices plagued by a massive counterfeiting operation need not face shareholder claims, a federal judge ruled. Steven Bell hoped to represent a class in San Francisco after shares in Ubiquiti Networks plummeted when it acknowledged in May 2012 that a former distributor, Kozumi USA Corp., "had stolen source codes and proprietary designs for the company's popular and profitable AirMax line of products and was engaged in a scheme to manufacture and distribute counterfeit Ubiquiti products in South America and other emerging markets in direct competition with the company." Ubiquiti won a permanent injunction against Kozumi this past October, with Ubiquiti CFO John Ritchie telling the court that the knockoffs caused an 88 percent decline of sales for Argentina between the second and third quarters of 2012. Bell meanwhile claimed that Ubiquiti had filed "false and misleading" statements with the Securities and Exchange Commission, despite its knowledge of the "widespread" knockoff problem. He said Ubiquiti had characterized the counterfeiting scheme as a "mere potential risk or contingency" in its registration statement, though it knew that the counterfeiting scheme was an actual and growing problem. U.S. District Judge Yvonne Gonzalez Rogers dismissed the complaint last week, however, after finding that the registration statement did elaborate on the scheme and revealed the potential for future problems. "The difficulty with this position, as defendants point out, is that the registration statement divulges that Ubiquiti had, at the time of the registration statement, 'found and expect[ed] in the future to find counterfeit goods in the marketplace being sold as Ubiquiti products,'" the March 26 opinion states. Shareholders may amend their claims, however, that Ubiquiti CEO Robert Pera was misleading in a Jan. 31, 2012 statement. "With respect to Pera's representation of Jan. 31, 2012, regarding consistent results that 'drove the upside' in 2Q12, plaintiffs adequately plead material misstatement because it is plausible that a reasonable listener could interpret Pera's statement to mean that sales orders in Argentina had remained consistent between 1Q12 and 2Q12 when, plaintiffs allege, they in fact had dropped," Rogers wrote. "However, the court ultimately concludes that plaintiffs fail to plead that Pera made the accused statement with scienter." Plaintiffs have until April 21 to file a second amended complaint.